Paul Krugman Warns Trump’s Policies Are Leading the U.S. Economy Towards a Major Financial Crisis
Nobel laureate in Economics Paul Krugman issued a stern critique of Trump and his policies on April 11, warning that Trump’s decisions are pushing the U.S. economy towards the brink of a “significant financial crisis.” He noted that Trump’s erratic policies lack economic logic, and constructive agreements with other countries are unlikely to be reached. Recent sharp declines in U.S. bonds and the dollar corroborate this assessment, suggesting that Trump’s short-sighted policies may lead the U.S. to lose its position as a global economic leader.
(Background: Trump’s tariffs have shattered the “safe haven myth” of U.S. bonds, now viewed by Wall Street as “risky assets,” with China and Japan as the culprits.)
(Additional Context: Just as the EU approved a 25% retaliation tariff on U.S. products, Trump shifted his stance… Who changed his mind?)
Trump’s New Round of Tariff Policies
On April 3, U.S. President Trump introduced a new round of tariff policies, announcing a baseline 10% tariff on multiple countries and imposing higher reciprocal tariffs on specific nations, such as China and Japan, impacting over 180 countries worldwide, resulting in severe turmoil in global financial markets.
However, Trump has recently postponed the effective date of tariffs on multiple countries, maintaining only a high-pressure stance towards China. This move has sparked market discussions, with some believing Trump’s position is not as aggressive as before, perhaps to avoid a full-blown trade war that could trigger a global economic recession. Encouraged by this, the U.S. stock market and cryptocurrency market, which had been declining for several days, rebounded, showing slight improvement in market sentiment.
U.S. Bonds and Dollar Plunge Signals Warning
It is worth noting that both U.S. bonds and the dollar have recently declined, prompting investors to reflect. According to Bloomberg, the $29 trillion U.S. bond market recorded its worst weekly decline since the 2019 repurchase market crisis, with 10-year Treasury yields soaring to their highest level since February, and 30-year Treasury yields even breaching 5%. The dollar saw its largest weekly drop since 2022.
In response, Kathy Jones, Chief Fixed Income Strategist at Charles Schwab, analyzed that the simultaneous plunge of U.S. bonds and the dollar indicates a collapse of market confidence in U.S. policies. Investors are beginning to question the status of U.S. bonds as a safe haven asset and are attempting to shift towards more stable bond markets, such as Europe. This phenomenon reflects not only investor fears concerning the uncertainty of Trump’s tariff policies but also suggests challenges to the fiscal health and economic stability of the U.S.
Krugman’s Warning: Erratic Trump Policies Threaten America’s Future
Against this backdrop, Nobel laureate Paul Krugman harshly criticized Trump and his policies on April 11, warning that Trump’s decisions are pushing the U.S. economy towards the brink of a “major financial crisis.” He analyzed the fatal flaws in Trump’s policies and their far-reaching impacts on the U.S. and global economies.
Erratic Policies Undermine Market Confidence
Krugman pointedly described Trump’s tariff policies as “stupid, erratic, and weak,” arguing that the initial announcement of high tariffs, followed by a 90-day postponement, lacked coherence and logic. He noted that the 90-day pause does not eliminate uncertainty but rather increases confusion among businesses and investors. “If you are a business owner, would you make significant investments in the coming months? I certainly wouldn’t,” Krugman stated.
Krugman argued that Trump’s decisions lack economic logic and are even a form of political theater. This short-sighted behavior prevents businesses from formulating long-term plans, thereby suppressing investment and economic activity:
“Trump and his advisors, like Peter Navarro, believe that trade deficits are evidence of foreign countries taking advantage of us, but this completely misunderstands the fundamental principles of economics. Trade deficits are driven by domestic savings and investment gaps, and tariffs do not solve this problem.”
This uncertainty is as harmful as the high tariffs themselves and may lead to supply chain disruptions and rising consumer prices.
Optimism About Achieving Favorable Trade Agreements is Unlikely
Additionally, Krugman questioned Trump’s ability to negotiate beneficial trade agreements with multiple countries. He stated that even if Trump postpones tariffs on some countries, his high-pressure stance towards China indicates that his trade strategy remains confrontational rather than cooperative. Krugman emphasized that even lighter tariffs (e.g., 10% globally, 60% on China) would severely damage the economy, let alone the current policy, which far exceeds this scale.
The tariffs post postponement remain the largest trade shock in U.S. and world history.
Krugman further pointed out that Trump’s tariff policies have damaged the credibility of the U.S. as a reliable trading partner, leading both allies and adversaries to doubt his intentions, making constructive negotiations difficult. He believes that U.S. trade partners, such as the EU, Canada, and Mexico, may adopt a strategy of “fake concessions,” superficially compromising to appease Trump, while not actually changing trade structures.
Where is America Headed? Increasing Risks of Financial Crisis
Krugman concluded with a warning that Trump’s policies are leading the U.S. into unknown perilous territory. He stated:
“We still face significant risks of a financial crisis.” He believes that the uncertainties triggered by tariffs have weakened the appeal of the dollar and U.S. bonds, and foreign investors withdrawing capital could drive up U.S. borrowing costs, further exacerbating fiscal pressures.
Krugman sharply criticized those who believe Trump’s policies are harmless, stating that they “should steer clear of sharp objects.” He noted that high tariffs would push inflation up, suppress consumption, and disrupt global supply chains, leading to recession risks. The plunge in U.S. bonds and the dollar has already validated his concerns, showing that market confidence in the U.S. economic outlook is collapsing. He believes that Trump’s short-sighted policies may lead the U.S. to lose its position as a global economic leader:
“The stock market may sometimes fluctuate due to meme investments or retail frenzy, but the bond market and currency market are where the real players engage. And now, when you see the dollar depreciating and U.S. Treasury yields soaring, it means the market is saying: we no longer believe that the U.S. can manage its economy properly — a very dangerous signal for a country with the global reserve currency.”
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